Unit 2 - Chapter 5

Unit 2 - Chapter 5

1. The decision making process

   • Setting objectives: The success of a decision can only be judged against the objectives or targets that are set
   • Gathering and interpreting information: This may be done before making a decision. Advances in information technology have made this stage easier for managers
     • Reviewing: To judge whether the decision is having the desired effect and meeting the objectives that were set
   • Selecting the chosen option: Choice based on data
     • Implementing the decision: Manager will take actions and communicate their intentions to interested parties

2. Types of decisions

   • Programmed and non-programmed decisions
     • Programmed: Deal with problems that are familiar and where the information required to make them is easy to define and obtain. The situation is well structured and there are often procedures, rules and polocies
       • Non-programmed decisions: Deal with situations that are unstructured and require a unique solution. Unusual decisions that may be risky e.g. major imvestment or entering a new market
       • Tactical and strategic decisions
         • Some are strategic, meaning that they are long term, involve a major commitment of resources and are difficult to reverse.
           • Some are tactical meaning that they are short-term, taken more regularly and involve fewer resources

3. Decision making, risks, rewards and uncertainty

   • Risk is normally measurable. When considering a price cut, it may be possible to research the buying habits of the targeted consumer group to assess the possibility of this happening,
     • Rewards result if managers take good decisions. If the manager considering the price cut had decided to reduce the price of the products and sales had risen substantially as a result, the the reward could have been in the form of increasing revenues and possibly profits.
     • Opportunity cost: The best option that a manager gives up in making a decision

4. The scientific decision making process

   • 1. Recognising that there is a problem or opportunity
     • 2. Setting objectives for what you want to achieve
       • 3. Setting decision criteria and deciding how important each one is
         • 4. Developing an identifying alternatives
         • 5. Comparing the alternatives by analysing the available data
           • 6. Choosing and implementing a course of action
             • 7. Reviewing the effectiveness of the decision
   • A scientific approach to decision making is rational and logical. Decisions are based on information not intuition. This approach is likely if there is high degree of risk that managers are seeking to reduce if a major decision is to be taken
     • Implications
       • Data may be too expensive to collect
       • Data may not be reliable
         • Difficult to discover customer' views on a product that is unfamiliar to them

5. Decision making based on intuition or 'hunch'

   • Managers have to rely on their instinct as to whether to make a particular decision. Intuition or hunch may be appropriate when data is less likely to be available or managers fear that it is not reliable
     • Other circumstances in which this may be appropriate may include:
       • When an important part of a decision is making an assessment of a potential business partner's personality or character
       • Assessing whether an advertising campaign for a new product may catch the attention of consumers

6. Decision trees

   • A decision tree is a mathematical model which can be used by managers to help them make the right decision
     • The square shows that a decision has to be made and the lines coming from it show the possible choices facing the manager
       • Expected values: the financial outcomes from a specific course of action adjusted to allow for the probability of it occuring
         • Net gains: the expected values of a course of action minus the costs associated with it
   • Benefits
     • It makes managers think about the different options they have and consider the possible consequences of each one. This process may uncover other possibilities that had not been considered before
     • Using decision trees may result in a more logical, less rushed process based on evidence rather than gut feeling
     • It forces managers to quantify the impact of each decision considering the forecast costs, benefits and possibilities of events happening
       • Decision trees provide a logical comparison of the options available to managers at a given time
         • Limitations and drawbacks
           • Decision trees only include financial and quantifiable data; they do not include qualitative issues such as the workforce's reaction to different options or the impact on the firm usage
             • Decision trees use estimates of probability of different outcomes and the financial consequences of each outcome. The value of decision tree analysis depends heavily on how accurate these estimates are. Probabilities are often estimates and this makes decision trees open to manipulation by managers determined to achieve a desired outcome
               • It is difficult to use decision trees effectively when the range of possible outcomes is not clear and those that can be anticipated can't easily be quantified.

7. Influences in decision making

   • The business' mission and objectives
     • A business' mission sets out its broad purpose and it may be appropriate to consider major, possibly non-programmable, decisions against this
       • Objectives are quantifiable and time-related targets and can be an important influence on different types of business decisions
   • Ethics
     • Ethics can provide moral guidelines for decision making by managers. An ethical decision means doing what is morally right.
       • A number of business' have been accused of taking unethical decisions. These decisions are not illegal but some would consider them to be morally wrong
   • The risk involved
     • If a manager is taking a high-risk decision, they may want to take steps to reduce the risk by gathering data on which they can base their decisions. Managers will be more cautious
       • A low-risk programme decision is more likely to be made relatively swiftly using intuition or hunch. Such decisions are likely are likely to be more familiar and more able to be quantified and therefore techniques such as decision trees may be employed